Traders work at the kiosk where Pandora is traded at the New York Stock Exchange. Photograph: Brendan Mcdermid/Reuters

Pandora, the music streaming company, saw its valuation rocket to $4.2bn (£2.6bn) in the first hour of trading at its flotation on the New York stock exchange – $1.6bn higher than anticipated.

Shares in Pandora traded at $26 each in the opening minutes of its market debut on Wednesday, 60% higher than the loss-making company's initial offer price of $16.

Pandora's shares opened at $20, up 25%, and went as high as $26, briefly valuing the company at $4.2bn – more than twice the value of AOL.

The share price settled back during the first hours of trading to about $22, a market value of $3.6bn.

While the surge was expected – Pandora has put only about 9% of its shares on the public market and investors clamoured to get hold of the limited supply – the market's appetite for technology stocks continues unabated.

Demand mirrored the pattern seen with recent tech flotations such as LinkedIn, which saw its shares soar from $45 each to $90 in the opening minutes of trading last month.

However, if the trading pattern remains true to form Pandora can expect its share price to fall back by perhaps a fifth in the coming days, in line with what occurred to LinkedIn and Russian search engine Yandex.

Pandora reported revenue of $51m, with a net loss of $6.8m in the three months to the end of April.

The company has 90 million registered users in the US and makes money mainly from advertising, with significant costs for music royalties to record companies – it paid out $29m in three months to the end of April.

Pandora also warns that its revenue growth rate is expected to decline in the future as the business matures and encounters more competition.

While investors have taken the chance to buy shares, Pandora faces competition on numerous fronts, including from satellite radio provider Sirius, music services such as Rhapsody and cloud storage services from Apple, Google and Amazon. Spotify's long-awaited US launch is also said to be close.

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